WTF is Fund Accounting?

This post was written in collaboration with Doug Dyer, CFO at Chapter One. Chapter One is a full-stack crypto fund built for early-stage founders, that strives to be the first check-in powerful stories they want to co-write alongside incredible founders.

What is accounting and why it matters

Generally speaking, accounting is the process of measuring and communicating the value of different financial assets and dates back to the year 1494. While accounting is primarily backward-looking and based on past transactions, strategic finance professionals can use it to understand the present and predict the future.

What role does accounting play in venture capital?

Venture capital (VC) is defined as a form of investment for early-stage, innovative businesses with strong growth potential. VC accounting helps stakeholders keep track of the money and understand the value of their investments. VC requires lots of money movement as deals are struck. Given this money movement, regularly changing valuations, and the increasing role of regulation, VC fund accounting can get confusing pretty quickly (Doug has written about this previously here, where he shares notable fund administration firms dedicated to helping VCs manage this on an ongoing basis).

One of the primary ways VC differs from traditional company accounting is that a VC firm is investing other peoples’ money, which brings additional reporting requirements for transactions and investment values to stakeholders. On top of that, each investor that participates in a venture fund (or other investment vehicle) can contribute a different amount of capital, meaning they each own a different percentage of the fund’s investments expense obligations. A fund accountant is responsible for keeping track of these varying percentages and reporting changes to each fund investor.

How does fund accounting work?

Fund accounting revolves around a ledger, which is used to track any instance in which money moves in or out of the fund. This includes capital calls, fees and expenses, investments, and distributions. The ledger “ties” to the bank accounts or other “sources of truth” for cash movements.

When an LP (“limited partner”) signs a contract to invest in a fund, they don’t transfer the full amount of money they commit (their “commitment”) at the get-go. In most cases, funds are transferred over a predetermined period of time using what are referred to as capital calls. A fund accountant is responsible for tracking capital calls as LPs fulfill their commitments over time.

Fund accountants also manage valuation reporting, or the process of tracking, updating, and communicating changes in value of the fund’s investments. For a venture fund that is investing in early-stage companies, valuations typically change when a portfolio company raises a subsequent financing round, although that is up for debate (see Fred Wilson’s latest, Valuing a Venture Capital Portfolio).

An accountant will use the details of the financing round (such as company valuation and price per share) to determine how the financing event has increased (or decreased) the value of the fund’s previous investment. These reports are delivered to the fund’s LPs on a predetermined cadence (usually quarterly) that is set by the fund’s Limited Partnership Agreement (LPA).

How does accounting work for SPVs?

SPVs are vehicles typically formed by VCs or individual investors to make a single investment into a single company (vs. a traditional VC fund, which invests in a portfolio of companies in one fund vehicle). Because SPVs there is only one company in the vehicle, the accounting and reporting requirements are much simpler than those of a fund.

Typically, money moves into the investment vehicle when the initial investment is made and out of the investment vehicle when an “exit” or distribution occurs. Additionally, since the SPV investors fund their entire commitment upfront, there are no capital calls to keep track of going forward.

Given the simplicity of an SPV, accounting values (e.g. each investor’s ownership % and the value of an asset) can typically be tracked without the hands-on involvement of a fund accountant.

Why does it all matter?

VC fund and SPV investors are judged on their investment performance but this can take years! Along the way, both VC funds and SPVs are required by their investors to accurately account for and present their investments, expenses, and financial transactions. Doing this in an accurate and clear manner inspires confidence from investors, which can only help VC fund and SPV managers as they grow.

Thanks for reading! If you’re interested in learning more about fund accounting,here are a few resources we recommend:

This post was written in collaboration with Doug Dyer, CFO at Chapter One. Chapter One is a full-stack crypto fund built for early-stage founders, that strives to be the first check-in powerful stories they want to co-write alongside incredible founders.

What is accounting and why it matters

Generally speaking, accounting is the process of measuring and communicating the value of different financial assets and dates back to the year 1494. While accounting is primarily backward-looking and based on past transactions, strategic finance professionals can use it to understand the present and predict the future.

What role does accounting play in venture capital?

Venture capital (VC) is defined as a form of investment for early-stage, innovative businesses with strong growth potential. VC accounting helps stakeholders keep track of the money and understand the value of their investments. VC requires lots of money movement as deals are struck. Given this money movement, regularly changing valuations, and the increasing role of regulation, VC fund accounting can get confusing pretty quickly (Doug has written about this previously here, where he shares notable fund administration firms dedicated to helping VCs manage this on an ongoing basis).

One of the primary ways VC differs from traditional company accounting is that a VC firm is investing other peoples’ money, which brings additional reporting requirements for transactions and investment values to stakeholders. On top of that, each investor that participates in a venture fund (or other investment vehicle) can contribute a different amount of capital, meaning they each own a different percentage of the fund’s investments expense obligations. A fund accountant is responsible for keeping track of these varying percentages and reporting changes to each fund investor.

How does fund accounting work?

Fund accounting revolves around a ledger, which is used to track any instance in which money moves in or out of the fund. This includes capital calls, fees and expenses, investments, and distributions. The ledger “ties” to the bank accounts or other “sources of truth” for cash movements.

When an LP (“limited partner”) signs a contract to invest in a fund, they don’t transfer the full amount of money they commit (their “commitment”) at the get-go. In most cases, funds are transferred over a predetermined period of time using what are referred to as capital calls. A fund accountant is responsible for tracking capital calls as LPs fulfill their commitments over time.

Fund accountants also manage valuation reporting, or the process of tracking, updating, and communicating changes in value of the fund’s investments. For a venture fund that is investing in early-stage companies, valuations typically change when a portfolio company raises a subsequent financing round, although that is up for debate (see Fred Wilson’s latest, Valuing a Venture Capital Portfolio).

An accountant will use the details of the financing round (such as company valuation and price per share) to determine how the financing event has increased (or decreased) the value of the fund’s previous investment. These reports are delivered to the fund’s LPs on a predetermined cadence (usually quarterly) that is set by the fund’s Limited Partnership Agreement (LPA).

How does accounting work for SPVs?

SPVs are vehicles typically formed by VCs or individual investors to make a single investment into a single company (vs. a traditional VC fund, which invests in a portfolio of companies in one fund vehicle). Because SPVs there is only one company in the vehicle, the accounting and reporting requirements are much simpler than those of a fund.

Typically, money moves into the investment vehicle when the initial investment is made and out of the investment vehicle when an “exit” or distribution occurs. Additionally, since the SPV investors fund their entire commitment upfront, there are no capital calls to keep track of going forward.

Given the simplicity of an SPV, accounting values (e.g. each investor’s ownership % and the value of an asset) can typically be tracked without the hands-on involvement of a fund accountant.

Why does it all matter?

VC fund and SPV investors are judged on their investment performance but this can take years! Along the way, both VC funds and SPVs are required by their investors to accurately account for and present their investments, expenses, and financial transactions. Doing this in an accurate and clear manner inspires confidence from investors, which can only help VC fund and SPV managers as they grow.

Thanks for reading! If you’re interested in learning more about fund accounting,here are a few resources we recommend:

This post was written in collaboration with Doug Dyer, CFO at Chapter One. Chapter One is a full-stack crypto fund built for early-stage founders, that strives to be the first check-in powerful stories they want to co-write alongside incredible founders.

What is accounting and why it matters

Generally speaking, accounting is the process of measuring and communicating the value of different financial assets and dates back to the year 1494. While accounting is primarily backward-looking and based on past transactions, strategic finance professionals can use it to understand the present and predict the future.

What role does accounting play in venture capital?

Venture capital (VC) is defined as a form of investment for early-stage, innovative businesses with strong growth potential. VC accounting helps stakeholders keep track of the money and understand the value of their investments. VC requires lots of money movement as deals are struck. Given this money movement, regularly changing valuations, and the increasing role of regulation, VC fund accounting can get confusing pretty quickly (Doug has written about this previously here, where he shares notable fund administration firms dedicated to helping VCs manage this on an ongoing basis).

One of the primary ways VC differs from traditional company accounting is that a VC firm is investing other peoples’ money, which brings additional reporting requirements for transactions and investment values to stakeholders. On top of that, each investor that participates in a venture fund (or other investment vehicle) can contribute a different amount of capital, meaning they each own a different percentage of the fund’s investments expense obligations. A fund accountant is responsible for keeping track of these varying percentages and reporting changes to each fund investor.

How does fund accounting work?

Fund accounting revolves around a ledger, which is used to track any instance in which money moves in or out of the fund. This includes capital calls, fees and expenses, investments, and distributions. The ledger “ties” to the bank accounts or other “sources of truth” for cash movements.

When an LP (“limited partner”) signs a contract to invest in a fund, they don’t transfer the full amount of money they commit (their “commitment”) at the get-go. In most cases, funds are transferred over a predetermined period of time using what are referred to as capital calls. A fund accountant is responsible for tracking capital calls as LPs fulfill their commitments over time.

Fund accountants also manage valuation reporting, or the process of tracking, updating, and communicating changes in value of the fund’s investments. For a venture fund that is investing in early-stage companies, valuations typically change when a portfolio company raises a subsequent financing round, although that is up for debate (see Fred Wilson’s latest, Valuing a Venture Capital Portfolio).

An accountant will use the details of the financing round (such as company valuation and price per share) to determine how the financing event has increased (or decreased) the value of the fund’s previous investment. These reports are delivered to the fund’s LPs on a predetermined cadence (usually quarterly) that is set by the fund’s Limited Partnership Agreement (LPA).

How does accounting work for SPVs?

SPVs are vehicles typically formed by VCs or individual investors to make a single investment into a single company (vs. a traditional VC fund, which invests in a portfolio of companies in one fund vehicle). Because SPVs there is only one company in the vehicle, the accounting and reporting requirements are much simpler than those of a fund.

Typically, money moves into the investment vehicle when the initial investment is made and out of the investment vehicle when an “exit” or distribution occurs. Additionally, since the SPV investors fund their entire commitment upfront, there are no capital calls to keep track of going forward.

Given the simplicity of an SPV, accounting values (e.g. each investor’s ownership % and the value of an asset) can typically be tracked without the hands-on involvement of a fund accountant.

Why does it all matter?

VC fund and SPV investors are judged on their investment performance but this can take years! Along the way, both VC funds and SPVs are required by their investors to accurately account for and present their investments, expenses, and financial transactions. Doing this in an accurate and clear manner inspires confidence from investors, which can only help VC fund and SPV managers as they grow.

Thanks for reading! If you’re interested in learning more about fund accounting,here are a few resources we recommend: